Venezuela, Russia and the high-stakes gamble to raise the global price of oil

In a desperate bid to save its economy, Venezuela is trying to convince oil producers such as Russia to cut production as a way to boost prices. For now, Russia is sending out mixed signals.

The sun sets behind an oil well in a field near El Tigre, a town within Venezuela's Hugo Chavez oil belt, formally known as the Orinoco Belt. Photo: AP

Venezuela, the country that has suffered the most from the drop in oil prices, is trying to drag Russia into its game, the goal of which is to make a deal with OPEC members about cutting oil production. However, thus far, these efforts have been to no avail.

Venezuela's Minister of Oil, Eulogio del Pino, is touring the countries that produce oil, both those who are and who aren't a part of OPEC. In early February he visited Moscow, where he met Russia's Minister of Energy Alexander Novak, and the president of Rosneft, Russia's largest oil company, Igor Sechin.

During the meetings, the main focus was on possible collaboration to convene an extraordinary OPEC meeting, which would cover the issue of lowering oil production as part of a new quota.

How to “stop the insanity”?

Venezuelan president Nicolas Maduro, who had called his Russian colleague Vladimir Putin, supported Del Pino’s mission in Russia. He hopes to persuade the major oil producers to act together on the market to “stop this insanity,” which led to the drop in oil prices to the level of $30 per barrel.

Even before that, Maduro has made hectic attempts to raise oil prices, the income from which comprises 96 percent of currency income in Venezuela. However, if earlier during his travels around the world he insisted that the “fair” oil price had to be $100 per barrel, right now he's ready to settle at $60 per barrel.

During past crises, the oil producing countries were able to come to an agreement about cutting oil production, and this strategy was generally successful, as Russian consulting agency RBK reminds us. Thus, after the oil price drop in 1998 (from $25 in 1997, prices fell to below $10 in 1998) OPEC has made a few attempts to influence the market, lowering the daily production.

By March 1999 the cartel was able to agree on cutting production with other countries – Mexico, Norway, Russia and Oman. In total, daily production was lowered by 2.1 million barrels, 1.7 out of which belonged to OPEC countries. The united efforts had an effect: by May 1999 the price of oil was restored to $16 per barrel, and in 2000 it grew to $30.

This time, though, Russian officials, oil industry representatives and many experts express their well-grounded doubts about the ability of oil-producing countries to establish a quota for black gold production.

According to Sberbank CIB analyst Valery Nesterov, it’s doubtful that Russia will agree to decrease oil production by 5 percent, which amounts to 26.7 million tons a year (547,000 barrels per day), although in theory it can agree to decrease the export of oil by 5 percent.

“The question is who will replace our country in the lost markets,” says Nesterov. “A one-sided decrease in production by Russia, even if the government will succeed in persuading private companies of its necessity, won't resolve the problem of oil price drops in the world.”

In the expert's opinion, in current conditions Saudi Arabia won't bear the burden of decreasing production single-handedly, risking the loss of its share of the market, which can as well be taken by Iranian oil.

“I doubt Riyadh is in such a disastrous position as to do a favor to its competitors on the market and even its foreign policy rivals in the region, such as Iran,” Nesterov says.

In the meantime, during the negotiations with the Venezuelan minister, Novak has announced that Russia is ready to take part in the upcoming OPEC meeting. At the same time he reported that Russia is ready to cut its own oil production by 5 percent. But soon after Novak's announcement, four OPEC representatives have simultaneously denied it, saying that they haven't heard about any meeting.

As a result, the Russian minister had to clarify his statement. According to him, the agreement was achieved with Venezuela only, and there have been no talks with Saudi Arabia and OPEC yet. Then he disavowed his early position in an interview with Bloomberg Television.

“A decision on cutting oil production is possible only if all crude-exporting nations are in agreement and there’s no timing for talks,” Novak said. “We’re ready to discuss the issue of cutting oil output volumes but not ready for a decision. We’re ready to consider the possibility; this should be a consensus. If there’s a consensus, it makes sense.”

Foreign experts suggest that by sending out contradictory signals, Russia is simply trying to get the lay of the ground to evaluate how OPEC would react to Venezuela's desperate call, which was supported by Moscow only in words.

In fact, Venezuelan authorities are engaging in a high-stakes poker bet with Russia, the main element of which is an open bluff. And one can't insist that this trick doesn't work at all. After the appearance of announcements that Russia is negotiating with OPEC member countries, the price of oil rose to $36 per barrel for a short while.

The jump was so unexpected that it confused even the representatives of Russian oil companies. A sudden growth of oil prices during the wait for an agreement for cutting production with OPEC was “idiotic,” Mikhail Leontiev, Rosneft's official representative and vice president, told the Financial Times. According to him, “nothing new has happened” that could point at the strengthening of the chance of such agreement being settled

Bound by a single goal

Russia and Venezuela are bound by a chain of oil dependency. And they have a common goal – to bring up the price for energy producers by any means. But, as Russian analysts point out, both countries start experiencing the same painful syndromes in such a “link.”

All the others have grown: Saudi Arabia – by 3.4 percent, Norway – by 0.9 percent, the U.S. – by 2.6 percent, and Canada – by 1.0 percent.

“It's obvious that in a situation like this, oil prices are the major factor in setting the economic dynamics,” Nikolaev says. “What's happening in Venezuela altogether? Perhaps it's the future of Russia?”

Barclays' analysts describe the situation in Venezuela as “the worst economic crisis in its history.” The International Monetary Fund (IMF) forecasts the inflation rate in this Latin American country to hit 720 percent in 2016, GDP to drop by another 8-10 percent and the level of unemployment to rise to 18 percent.

And even though the situation in Russia is far from being similarly catastrophic, according to Igor Nikolaev, ”there's more and more similarities and less differences” in the situations of the two countries. To such similar traits he attributes the refusal to carry out structural reforms in the economy and relying only on the bounce of oil prices.

A separate question – can Russia provide any kind of economic support to friendly Venezuela at the moment? Rosneft has already invested at least $1.8 billion into Venezuelan projects. At the end of May last year, it was announced that the volume of investments would reach $14 billion, but at which level they are now is not known.

The profitability of these projects, planned for the long term, is still under question. The new composition of the country's National Assembly, where the opposition received two-thirds of the seats in last December’s elections, is planning to start an impeachment process against president Maduro in mid-2016.

As stated by Mikhail Leontiev, Rosneft representative, “The activity of the company in Venezuela does not depend on the type of authority, it's carried out within the scope of approved international procedures.”

However, the possible change of power in this country can lead to the return of big American oil companies to Venezuela, the ones that were once thrown out by ex-president Hugo Chavez. And that would put Russian oil producers into a much more competitive environment in this country, especially with all the economic problems in Russia itself.

The U.S. is helping Venezuela find a solution

In this situation the announcement that the U.S. has carried out its first oil shipment to Venezuela is worthy of attention. That's the first shipment to the OPEC member country after the removal of the embargo on American oil export. The oil has been received by Venezuelan state oil company Petroleos de Venezuela (PDVSA).

So from being a consumer country, which it has been for many years unrelated to Venezuela's ruling regime, the U.S. has become in part an exporter of hydrocarbons to Venezuela.

And that's entirely in Caracas' interests, as together with their wanderings around the world in search of unreachable goals they've been trying to achieve and bring to life quite a real project – creating a new competitive type of oil product based on mixing the heavy Venezuelan oil with a light one.

In 2015 PDVSA has imported about 40,000 barrels of light oil per day from Russia, Nigeria and Argentina. And now it has first received 548,000 barrels of oil from the U.S.

This experiment shows that much better results can be achieved with a flexible and creative approach to resolving the existing oil market problems, rather than just relying on oil price growth as the panacea for all troubles.